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Notes on the Tax Treatment of Structures

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  • Roger H. Gordon
  • James R. Hines Jr.
  • Lawrence H. Summers

Abstract

More than three quarters of the United States tangible capital stock represents structures. Tax policies potentially have a major impact on both the level and composition of investment in structures and equipment. This point is explicitly recognized in most discussions of the effects of capital income taxation. Two aspects of the taxation of structures --the relative burden placed on structures as opposed to equipment investment and the non-taxation of owner occupied housing under the income tax -- have attracted substantial attention in recent years. This paper explores these two aspects of the taxation of structures investments. While the tax system may well have a potent impact on the level and composition of structures investment, this paper argues that conventional analyses of these effects are very misleading. We reach two main conclusions. First,under current tax law, certain types of structures investment are very highly tax favored. Structures can be transferred and therefore depreciated more than once, and structures may be readily financed with tax-favored debt. Overall, itis unlikely that a significant bias towards equipment and against structures exists under current law. Second, the conventional view that the tax system is biased in favor of homeownership is wrong. Because of the possibility of "tax arbitrage" between high bracket landlords and low bracket tenants, the tax system has long favored rental over ownership for most households. The 1981 reforms by reducing the top marginal tax rate reduced this bias somewhat.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1896.

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Date of creation: Apr 1986
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Publication status: published as Gordon, Roger H., James R. Hines Jr. and Lawrence H. Summers. "Notes on the Tax Treatment of Structures, The Effects of Taxation on Capital Accumulation, ed. by Martin Feldstein, p. 223-254, Chicago: University of Chicago Press, 1987
Handle: RePEc:nbr:nberwo:1896

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  1. Constantinides, George M, 1983. "Capital Market Equilibrium with Personal Tax," Econometrica, Econometric Society, Econometric Society, vol. 51(3), pages 611-36, May.
  2. James M. Poterba & Lawrence H. Summers, 1985. "The Economic Effects of Dividend Taxation," NBER Working Papers 1353, National Bureau of Economic Research, Inc.
  3. Don Fullerton & Roger H. Gordon, 1981. "A Reexamination of Tax Distortions in General Equilibrium Models," NBER Working Papers 0673, National Bureau of Economic Research, Inc.
  4. Jeremy I. Bulow & Lawrence H. Summers, 1982. "The Taxation of Risky Assets," NBER Working Papers 0897, National Bureau of Economic Research, Inc.
  5. Modigliani, Franco, 1982. " Debt, Dividend Policy, Taxes, Inflation and Market Valuation," Journal of Finance, American Finance Association, American Finance Association, vol. 37(2), pages 255-73, May.
  6. Harvey S. Rosen, 1983. "Housing Subsidies: Effects on Housing Decisions, Efficiency, and Equity," NBER Working Papers 1161, National Bureau of Economic Research, Inc.
  7. Stiglitz, Joseph E., 1983. "Some aspects of the taxation of capital gains," Journal of Public Economics, Elsevier, Elsevier, vol. 21(2), pages 257-294, July.
  8. Gailen L. Hite & Anthony B. Sanders, 1981. "Excess Depreciation and the Maximum Tax," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 9(2), pages 134-147.
  9. Alan J. Auerbach & James M. Poterba, 1986. "Tax Loss Carryforwards and Corporate Tax Incentives," Working papers 413, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Patric H. Hendershott & David C. Ling, 1984. "Trading and the Tax Shelter Value of Depreciable Real Estate," NBER Working Papers 1267, National Bureau of Economic Research, Inc.
  11. David F. Bradford & Don Fullerton, 1981. "Pitfalls in the Construction and Use of Effective Tax Rates," NBER Working Papers 0688, National Bureau of Economic Research, Inc.
  12. Roger H. Gordon, 1982. "Interest Rates, Inflation, and Corporate Financial Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 13(2), pages 461-491.
  13. Alan J. Auerbach, 1983. "Real Determinants of Corporate Leverage," NBER Working Papers 1151, National Bureau of Economic Research, Inc.
  14. Alan J. Auerbach & James R. Hines Jr., 1986. "Tax Reform, Investment, and the Value of the Firm," NBER Working Papers 1803, National Bureau of Economic Research, Inc.
  15. White, Michelle J, 1983. " Bankruptcy Costs and the New Bankruptcy Code," Journal of Finance, American Finance Association, American Finance Association, vol. 38(2), pages 477-88, May.
  16. Titman, Sheridan D, 1982. " The Effects of Anticipated Inflation on Housing Market Equilibrium," Journal of Finance, American Finance Association, American Finance Association, vol. 37(3), pages 827-42, June.
  17. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(2), pages 147-175, November.
  18. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(4), pages 305-360, October.
  19. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, Elsevier, vol. 8(1), pages 3-29, March.
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